Executive summary

Fostering a community of active owners is also one of PRI’s nine strategic areas of impact for the next 10 years, as set out in the PRI Blueprint for Responsible Investment. In the last decade, many equity investors have implemented engagement strategies to conduct fruitful conversations with companies, either individually or collaboratively. Investor attention is now shifting to other asset classes – with corporate fixed income a primary focus due to the scale and importance of the world’s debt markets.

As part of PRI’s commitment to provide further asset classspecific guidance on responsible investment practices, this publication explains how to engage with bond issuers on ESG factors in order to identify and manage ESG-related risks, and increasingly also to maximise positive ESG outcomes. It focuses on ESG engagement with companies – including financial institutions – as opposed to government and government-related issuers.

This publication draws upon interviews with 17 investors and a law firm, guidance from an expert working group, data from the PRI Reporting Framework, and extensive desk research. It is published in conjunction with the ESG engagement for fixed income investors case study series, which showcase a variety of engagement processes, followed by examples of bondholder engagement in practice.

Why engage as a fixed income investor?

Investors typically engage with companies and other types of issuer to identify, monitor and manage risks to their investment returns. PRI signatories acknowledge that ESG factors can have a material impact on those returns. While the materiality of ESG risks is less familiar to bond than equity investors, ESG factors can affect the investment performance of bonds, both negatively and positively, at the issuer, sector, geographic and system levels.

There is a growing body of practical and academic evidence of the benefits to investors of engagement. They include: better understanding of companies by investors, and of investors’ expectations by company management; improved ESG disclosure; management and mitigation of financial risks; and the maximising of positive sustainability outcomes, including those related to the UN Sustainable Development Goals.

Practical guidance on ESG engagements

A growing number of PRI signatories engage in relation to at least some of their total fixed income holdings, with 66% of those investing directly in fixed income markets engaging with at least one type of issuer. A much smaller number of signatories engage systematically across a large proportion of their fixed income portfolios. Among European investors, for example, 23% engage on more than one quarter of their non-financial corporate bond holdings.

This report offers guidance on how fixed income investors might structure their engagement strategies as an integral part of their approach to responsible investment. It focuses on elements of engagement that are specific to investors in corporate fixed income. Wider insights and recommendations on developing an active ownership policy, assessing external managers and service providers, and disclosure on engagement activities are set out in a recent PRI publication – A Practical Guide to Active Ownership in Listed Equity. These can equally applied to other asset classes, including corporate fixed income.

This report, meanwhile, offers guidance on the following elements:

• Embedding engagement in the investment process: Engagement by fixed income investors should be an integral part of a responsible investment approach, and either conducted by credit analysts and portfolio managers, by a dedicated engagement team, or integrated with ESG specialists and fixed income specialists working alongside.
• Prioritising engagement activities: Investors are advised to prioritise engagement activity based on size and duration of holdings, credit quality, degree of transparency, materiality of ESG risks and opportunities, and priority themes and issues, among other things.
• Timing engagement: Timing the engagement is a strategic decision because the bondholder’s influence with issuers varies throughout the issuance lifecycle, and depends upon legal and regulatory rights and obligations.
• Defining objectives and measuring the effectiveness of engagement: Objectives should be developed by ESG teams in collaboration with investment teams to ensure they are robust and send consistent messages to companies.
• Factors determining the effectiveness of engagement: These include the size of the investor, the credit quality of the issuer, whether the debt is publicly issued or privately placed, whether the issuer expects to imminently return to the market, general market conditions, and issuer awareness of ESG issues.
• Collaborative engagement: Collaboration can be an effective way to gain corporate managers f attention, as well as pool knowledge, information and engagement costs, although the practice is not without its challenges.
• Overcoming common hurdles to engagement: These include misperceptions about bondholders f rights, about their position in the capital structure, their influence over and access to companies, and the implications of the growth of passive investing.

The report concludes with tips for effective bondholder engagement, including on how to: develop an engagement strategy; prioritise engagement; initiate dialogue with an issuer; conduct engagement discussions; follow up on engagement; and measure and monitor engagement. The appendices include suggestions for further reading, and a commentary from law firm Reed Smith on the scope and limitations of bondholder engagement.